This morning the Bureau of Economic Analysis released the 2021q1 state personal income data. Click over there to dive in yourself. I am likely currently stuck in a bison-induced traffic jam somewhere in Middle America. But that doesn’t mean you get off that easy. I do have an updated look at incomes across the U.S. for you. (And will dig into the new data in the weeks ahead, after I return.)
We know this cycle is different. We tend to usually think of state’s economies, and incomes tracking with the labor market, because they usually do. But not so far in the pandemic. Regardless of local employment trends, or the various return to normal type indices of activity, personal income growth is pretty much the same across all states. The reason is simple: federal aid. In particular the enhanced unemployment insurance benefits help states with larger job losses, and the recovery rebates went to households in every state. Remember, the goal of the federal aid was to ensure that unemployed workers did not have to take a job for financial reasons if they didn’t want to during a global pandemic*.
You can see this overall dynamic in the scatterplot below. Let’s first start with the light blue dots, which compare employment loss and changes in wages. As expected there is a clear, strong relationship. States with larger job losses, experienced larger declines in wages (or smaller gains). That’s pretty straightforward. Now, let’s shift to the dark blue dots. Here you can see there is hardly any relationship between job loss and total personal income growth last year. In fact if you look at the coefficients in the simple regressions and do the math, it shows that the federal aid mutes about 87% of the impact of job losses when comparing wages and total income. That’s not a perfect calculation, but the impact, and magnitude of federal aid is clear.
Now, this pattern should have held through today’s new data for 2021q1 given we saw large recovery rebates in March (the $1,400 per person). Moving forward, we would expect to see state incomes diverge based upon those underlying economic and labor market gains. States with strong job growth will see stronger income gains. However we’re not at that point in the cycle and expansion yet, thanks to federal aid which has more than plugged the financial hole caused by the pandemic.
* I put strong household incomes at the top of the list of labor supply constraints today, but the impact of the rebates will fade and the UI expires in a couple of months, these are temporary.
The labor market is tighter than you think. That’s the title of the joint report our office released a couple months ago with the Employment Department. In that report we wrote, “[a]t some point, declining COVID-related frictions, competition to hire workers, and relatively low unemployment will push to a market clearing wage that pulls more people back into the labor force.” Well, we’re seeing this play out in real time as it is clear firms are not responding to the pandemic like the long-lasting, demand-driven recessions experienced in recent decades.
Let’s first take a look at our office’s wage forecast that underlies both our economic and revenue outlook. You can see that the average wage has increased significantly so far during the pandemic, rising nine percent above trend. Our office has also built in a higher wage outlook over the long run. Wages have leveled up. These gains are seen in our withholding tax revenue as well. Now, the initial increase in wages was due to compositional changes. With the pandemic and shutdowns, the economy lost a lot of low-wage jobs, meaning that the average wage for those who kept their jobs was higher, even if per worker wages held steady.
But we know per worker wages have not held steady. The Atlanta Fed’s wage tracker shows continuing wage gains, unlike the past couple of cycles where wages sagged in part due to the nature of the cycle and the high number of unemployed workers per job opening. We know this cycle is different. What’s interesting to find, if you dig into the data further, is that the impact from the compositional changes in the labor market is mostly gone now based on the latest U.S. data. Overall, weekly earnings have increased nearly 8% since the start of the pandemic (annualized 6.5%). However if we hold the industry mix steady at pre-pandemic shares, earnings have risen just over 6% (annualized 5.3%), or 82% as much as the topline data. These are strong, underlying gains. (See methodology note at the end for more details)
If we look at these changes relative to pre-pandemic trends, you can see the evolution more clearly. Initially the spike in earnings was entirely due to the compositional changes, or the mix of industry employment. However over the past year, those underlying earnings have really picked up (combination of number of hours worked, and the hourly wage). As of April, 69% of the above-trend earnings gains are due to that underlying growth, with just 31% due to the industry mix.
So what does this mean? A number of things.
First, strong gains are expected to continue. The competition for workers is expected to remain fierce even as some of the unique pandemic circumstances holding back labor supply fade in the months ahead. Firms will need to get used to these dynamics. This is especially true within the lower rungs of the wage distribution, where wages were rising fastest even before the pandemic.
Second, wages are sticky. This is good news for workers. Employers rarely cut wages outright so the recent increases in pay should hold in the years to come.
Third, we are already seeing these dynamics play out in Oregon based on the latest job vacancy survey data from our friends over at the Employment Department. Starting wages for both retail, and transportation and warehousing have risen about $2 per hour in the past year. However they have not (yet) for leisure and hospitality. This industry competition is an additional hurdle for bars and restaurants as they staff back up. The data show that starting wages in retail now outpace leisure by $3.50 per hour, and transportation and warehousing outpace leisure by $7 per hour. To the extent we do see labor reallocation (workers moving into different industries), these are key numbers to keep in mind.
Fourth, the good news for firms is strong consumer demand means they can better afford to pay higher wages and pass along necessary cost increases to maintain profit margins. Plus the additional investment in equipment, IT, software, and the like we are seeing will further raise productivity, creating a virtuous cycle.
Fifth, stronger wage gains, and firms ability to pass along cost increases does indicate inflation that may be stronger in the years ahead, even as the reopening-related inflationary pressures fade. We are not talking about hyperinflation, but rather underlying gains stronger than we saw last decade. To the extent we do not get the productivity gains, then inflationary pressures in a supply-constrained economy will likely be larger.
Sixth, the key question is just how far do wages level up? In our forecast (first chart) we have wages slowing in the year ahead as those compositional effects reverse (we will be adding a lot of low-wage jobs back into the calculation). However given the updated analysis above and the job vacancy survey data, the risks are likely even more to the upside than we anticipated. Note that our most recent forecast marked the first time we raised the wage outlook over the entire forecast horizon like this and eliminated any expected recession-related weakness in the underlying trends. To be honest, at the time we developed the forecast – about two months ago – it felt like we were sticking our necks out. Some major national forecasters all had wages reverting to trend. This change is a major reason why the revenue forecast increased so much as well. But now the question is just how strong wage growth will remain, and to what extent those underlying gains offset the industry mix impact in the year ahead.
Finally, these dynamics are good news overall. They also mean the upcoming transition off the enhanced unemployment insurance benefits should be less of a concern. More-plentiful, and better-paying job opportunities are usually the key to drawing folks back into the workforce as well. And given the strong underlying earnings growth, it is possible that housing affordability may not be worsening as much as we think.
Methodology Note: For the decomposition work, I am using CES data for the private sector at a combination of the 3 and 4 digit NAICS level (110 subsectors in all). The earnings data is missing for rail, water, pipeline, and scenic transportation, and for education services, but all other private sector industries are included. This is granular enough to provide a solid look and account for the industry mix changes seen in the past year. To adjust for those, I weight the weekly earnings by sector by their 2019 average employment share of the total, and add them together to create the red line.
Economic growth is surging as the pandemic wanes. Thanks to federal fiscal policy, consumers have higher incomes today than before COVID-19 hit. Now they are increasingly allowed to and feel comfortable resuming pandemic-restricted activities like going out to eat, on vacations, getting haircuts and the like. The outlook for near-term economic growth is the strongest in decades, if not generations.
Given the strong underlying drivers of growth, the question becomes just how fast can the economy actually grow? Already supply constraints are evident in semiconductors, lumber, and rental cars to name a few. See our office’s table below for a broader view. Moving forward other short-term challenges of supply keeping pace with demand will emerge as well. Much of these constraints are expected to be temporary. Increased production and more efficient logistics will boost supply while higher prices and slower income growth as the federal aid runs out will cool demand somewhat. Better balance can be expected, although the path forward this year will likely be bumpier than expected.
The good news is some classic supply constraints like energy costs and credit availability are not currently issues holding back economic growth. The current issues largely revolve around production capacity, getting goods to market, and labor availability.
Currently, inventories are lean and demand is strong. Production needs to increase to meet the strong level of sales, which boosts overall economic growth. However many manufacturing sectors are already operating at or near capacity. They are constrained. To produce more, these industries need to invest in new plants and equipment, or add another shift. The overall economy reached this same point back in 2018-19 but the business investment never fully materialized as the trade war dampened demand even as the corporate tax cuts boosted incentives. This was before the pandemic put all investment plans on hold.
Today, these constrained sectors are currently facing the same choice, which has macroeconomic implications. On one hand, sales are high. To meet this demand and chase market share, profits, and the like, they need to make big, long-term investments. On the other hand, it is somewhat questionable just how sustainable these level of sales will be given the temporary federal boost to incomes, and the pandemic shifting consumer spending out of services and into durable goods and eating at home. See Jason Furman’s recent post and charts for a good look at current spending relative to trend.
Note that the constrained industries and those near capacity represent a 40% larger share of Oregon’s economy than they do nationwide (11.8% of Oregon GDP vs 8.3% of US GDP). We will have more on the regional manufacturing outlook in a follow-up post.
Overall, the best economic outcome would be to see new investments in production, which boosts both near-term growth, and raises long-run potential GDP as the productive capacity of the economy increases. The good news is that while industrial capacity as measured in real time in the Fed’s data isn’t really picking up yet, new orders for capital goods are booming, as is business investment in IT and software. Encouragingly R&D spending is doing well, and we might get additional federal spending in the pipeline too.
Now, of course the worst economic outcome here would be that production continues to be throttled due to capacity constraints and results in higher inflation but no real capacity increases.
Even so, the most talked about constraint on the economy today is labor, in part because it runs through all of these other issues. Attracting and retaining workers is already much more challenging than expected given the economy went through a severe recession last year. There are a variety of simultaneous factors impacting the number of available workers including strong household finances, the virus itself, and lack of childcare or in-person schooling. (See our office’s joint report with the Employment Department for more.) And while the temporary pandemic-related constraints will ease in the months ahead, the labor market is expected to remain tight for the foreseeable future in large part due to demographics and the large number of Baby Boomers retiring. Labor will remain a challenge for firms. But a tight labor market also works wonders for employees with strong wage gains and more plentiful job opportunities.
Outlook: This cycle is different. Overall the expectations are for exceptional economic growth this year and strong gains next. This economic recovery is front-loaded, unlike the last couple of long-lasting, demand-driven recessions. As such the risks primarily lie to the downside, not in terms of a double-dip recession, but in terms of growth “merely” being very good this year. That said, depending upon your horizon, these differences are not immaterial. Take our office’s forecast for example. The difference between a front-loaded recovery (red line) versus one that is not (dotted black line), has a big impact on the upcoming two year budget. The slower-paced recovery seen in the December forecast has average employment that is 2.7 percent lower over the next two years than the current, front-loaded outlook. Aggregate wages are 1.7 percent lower. (The smaller wage impact is due to the faster wage gains in recent months). Even as the current recovery will be stronger and more complete than recent cycles, the differences seen here are what you might expect in terms of growth in a supply-constrained economy.
Finally, for more on these issues, please see our latest economic and revenue forecast document. There is a good six pages on these supply constraints (with an Oregon focus) and another two pages on inflation. See our recent post on the drought, which is another supply constraint. Stay tuned for future posts on the local Oregon manufacturing outlook, and on the wage forecast.
It would have been nice if we could have dealt with the global pandemic, then moved on to the drought and ensuring water issues before fire season started back up. Alas we are not in that alternative timeline. As we’re all aware, the western U.S. is in an extreme/exceptional drought. All of Oregon is in some form of worsening drought or another. What follows is first a map of the current drought status as of this week, followed by a few maps I have been using lately in presentations when discussing the issue.
These maps show where in Oregon agriculture matters the most. The total market value of products is shown on the left, based on the latest Census of Agriculture. The map on the right shows where farm earnings account for the largest share of all local income. The numbers listed in individual counties is what share of income farm earnings account for relative to the U.S. overall.
When it comes to the types of ag most impacted by drought, we tend to see the bigger impacts on grains and hay/alfalfa more than on nuts and berries, and on beef cattle and grazing lands more than dairy. Just how much of this is due to the resiliency of the type of product produced versus what is grown where the drought is most severe, can be a bit hard to disentangle. Even so, regional economies on the eastern side of the state, where ag takes on a larger importance, are more likely to suffer the direct impacts of the drought given the types of products grown and produced there.
Now, keep in mind that farm earnings are really more of a net number (income minus expenses). The full economic impact from agriculture is larger. Production costs in terms of machinery and the like are roughly twice that of the net farm earnings. Farm equipment costs a lot of money, and equipment sales really are business revenue for local suppliers. Including the cost of other farm inputs like buying feed, seed, fertilizer, and hired labor, doubles the broader impact again. Combined all of these production costs, which are an indicator of the broader economic importance, are 4-5 times as large as the farm earnings in recent years.
On one level, drought has a direct impact due to lost crops and reduced farm income. However the impacts could be seen across the entire supply chain, from reduced sales to those input suppliers, and reduced product heading to food processors and the like. Depending upon the severity, and how widespread the drought is, it can have price impacts even in global commodity markets, ultimately pushing consumer prices higher. The little bit of a silver lining is farmers will get better prices on the product they are able to harvest and sell.
Finally, just a quick update on ag exports which are doing quite well recently due to strong demand and higher commodity prices. The total values in recent quarters are now back to where they were prior to the trade war.
Housing has been going gangbusters over the past year. However supply constraints and rising costs have slowed the market in the last month or two. Where we go from here is an interesting outcome and while we could/should be at an inflection point, it is tough to get a good read on exactly what is happening. This post tries to make sense of the current lay of the land.
First, there are clear, strong drivers for homeownership today due to the nature of the cycle where the job losses are heavily concentrated among low-wage workers, record low interest rates during the pandemic, and the demographic tailwind of the Millennials aging into their 30s and 40s.
Second, the sticker price for homes sold is up 15-20% in the Portland region since the start of the pandemic. However due to the drop in interest rates, this hasn’t had a material impact on affordability — measured as monthly housing expense as a share of income — until just recently. Record low interest rates at the end of 2020 allowed household budgets to stretch further in terms of home prices while keeping the monthly payment steady. Interest rates fell by one percentage point from late 2019 to late 2020, going from 3.7% to 2.7%. A one percent decline in rates offsets roughly a 13 percent increase in purchase price, while maintaining the same monthly mortgage payment. This means if a household was looking to buy a $400,000 home pre-pandemic, they could afford a $450,000 home during the pandemic. A $500,000 budget became a $565,000 budget, and so on.
You can see the offsetting impact of lower interest rates on higher home prices in our office’s affordability tracker. For all of 2020, affordability essentially moved sideways. Affordability did not worsen. However so far in 2021 that is now starting to change. Interest rates have ticked up from those record lows at the end of 2020 and are settling in around 3% or so recently. This increase of 30 or 40 basis points is not immaterial! And with ongoing price appreciation and higher interest rates, the monthly payment as a share of income is now up a 2-3 percentage points just in the past couple of months. This is at the upper range of normal from an historical perspective, but not yet way out of line.
A complicating factor here is we do not actually know what underlying income growth is for the typical family today. Real-time national estimates for median household income dropped a little bit during the recession and have grown slowly in the past 6-9 months. I am using that income pattern underneath the numbers shown in the chart above for the affordability calculations. However it’s hard to know how accurate those are and we really need to wait for the lagged Census data to confirm or deny. We do know that wage gains have continued apace for those who kept their jobs throughout the pandemic. If underlying family incomes continued to grow in the past year like they were pre-pandemic (~5% annually) then the current state of housing affordability does look a bit different. Instead of being at the upper end of the normal range, current affordability at today’s prices and interest rates is right in line with the historical average. Mathematically that means we could see another 8% price appreciation from here and then be at the upper end of the historical range.
Note I am excluding the impact of the recovery rebates on family incomes. They certainly can help with a larger down payment or other costs, but the bank won’t give you a larger loan due to a one-time rebate. Also note the income used here is median family income and not median household income. The reason is most homeowners are families (72%) with married-couple families accounting for the bulk of that (60% of all homeowners).
Now, given the sticker price of housing is so much higher today, there is increased chatter that the housing market may be in another bubble. While identifying bubbles in real time is challenging, there is no question that the current market is substantially different than the one from the mid-2000s.
In particular, even if buyers are overextending themselves a bit in part due to the belief home prices only go up, the macroeconomic implications today are much less dire. The credit quality of new mortgage loans has never been stronger. Any fallout from the housing market will not have the same spillover into the broader economy or financial system. Additionally today’s market is supply constrained where much of the mid-2000s was tied to speculative pricing and not underlying imbalances in supply and demand.
Even so, one key metric to watch on the bubble front is the differences in housing costs for owning and renting. At a fundamental level, housing is all about having a roof over your head. Households make the best choice for themselves given the various options and costs. But ultimately these costs for owning and renting should move together over time, which is what you see in the historical data even if they do differ at various points in time.
Today, the traditional price to rent ratios are through the roof. This can be a bit disconcerting. But those measures all use the sticker price of home sales and not the underlying monthly housing cost which is sensitive to interest rate changes. If we switch to using the monthly expense and compare with rents, we see a much more stable relationship. That said, given the run up in ownership costs and the somewhat slower rent increases, the price to rent ratio is getting near the upper end of the historical range, albeit a long way from where it was during the actual bubble.
Note that I am using Owners’ Equivalent Rent from the CPI data as the rent inflation measure. If you don’t like OER, and some do not, I have also used the Zillow rent index as a different measure and it shows nearly the exact same pattern in the past 7+ years.
What is the outlook from here?
Inventory remains very low. The adjustments are much more likely to come on the demand side than on the supply side. When ownership costs rise like this and affordability worsens, demand traditionally slows and price appreciation does too. We saw this back in 2018-19 when interest rates rose. A similar pattern is likely underway today. Weekly applications for mortgages have slowed and anecdotal information from builders indicates the cost increases and supply chain delays are starting to weigh on demand some. These are all happening within the past handful of weeks, and aren’t yet part of the broader housing market narrative.
Now, on the supply side, new single family construction activity is the strongest its been since the mid-2000s. It should stay at these higher levels, even with the supply chain constraints. National reports indicate builders are starting to throttle back on new sales due to the uncertain building material prices, and the fact they need to catch up on actually building all the homes they sold recently. As such the headline new construction numbers may soften in the months ahead, even as the underlying fundamentals remain strong. Additionally, the share of current homeowners saying now is a good time to sell is also back to high rates. It is possible existing home inventory will pick up, helping with the overall supply of homes for sale. Of course the problem for homeowners today is if they sell, they need to find somewhere else to live.
Now, these big market adjustments take time. They are not instantaneous in part because every one of us has a slightly different situation in terms of need, income, etc. It is possible, especially given the strong underlying drivers of housing demand, that the adjustment process takes longer than usual, or longer than you might think. Should this occur, and affordability worsens further, and the price to rent ratio diverges more, then, and really only then can the discussion turn to whether another bubble is forming. However today that is far from clear. No doubt the sticker price of homes has risen considerably during the pandemic. However these gains to date are pretty easily explained by higher incomes, strong demographics, and low interest rates.
Finally, one of the main reasons we care so much about affordability is how it relates to population growth and in-migration. Oregon’s ability to grow at a faster pace than most other states is largely about our ability to attract young, working-age migrants who allow local businesses to hire and expand are faster rates. Affordability has been at the top of the list of concerns our office has had in the past decade. Usually it’s not so much that worsening affordability pushes people to pack up and leave so much as it is more of an initial repellent where people looking to move choose to move somewhere else to begin with due to affordability and availability challenges.
During last week’s economic and revenue forecast release, a number of important questions were raised regarding working parents and more details on the racial and ethnic gaps experienced in the economy. Our office’s follow-up research is shown below in the slides.
The upshot is that while clearly the lack of in-person schooling is a major challenge for a lot of families, it’s not really seen in the macro data. Working moms experienced job losses at about the rate as the overall economy. Dads are among the best performing socio-economic groups. On one hand, this is encouraging in that distance learning is not holding back the recovery as much as first thought. On the other hand we just went through a global pandemic and shutting down schools “only” meant families had to juggle extra to make ends meet. It’s likely not as rosy of a social story as it is an economic one. At this point I’m putting working parents and childcare/schooling in the “it’s always a challenge, and while the pandemic didn’t worsen the situation, it has brought it more into the light” bucket, right there with struggling renters, which I will have an update on next week.
Now, on to the slides. If you’d like to discuss these further, please reach out (email me).
Updated 6/4: Slides are updated to include the latest data, and a couple new slides – one on parents, and one on concentrated wealth by race and ethnicity.
This afternoon the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary and a copy of our presentation slides.
Economic growth is surging as the pandemic wanes. Thanks to federal fiscal policy, consumers have higher incomes today than before COVID-19 hit. Now they are increasingly allowed to and feel comfortable resuming pandemic-restricted activities like going out to eat, on vacations, getting haircuts and the like. The outlook for near-term economic growth is the strongest in decades, if not generations.
Oregon’s labor market is expected to return to full health during the upcoming 2021-23 biennium. With the strong near-term outlook for consumer spending, job growth is front-loaded such that the largest employment gains will occur this summer and fall. Total employment in Oregon will surpass pre-pandemic levels in late 2022 with the unemployment rate returning to near 4 percent in 2023.
While a jobs hole remains in the labor market, the same cannot be said for household incomes. Currently incomes in Oregon are 20 percent higher than before COVID-19 hit, thanks in larger part due to the temporary federal measures put in place. Excluding the direct federal aid, incomes are back to pre-pandemic levels and expected to grow 6-7% this year and next.
However, with such a strong consensus near-term outlook, the risks do primarily lie to the downside. The risk is that supply cannot keep pace with demand. The path forward may be bumpier than expected, even if the trajectory is up. Already supply constraints have emerged in semiconductors, lumber, and rental cars to name a few. More bottlenecks are likely on the horizon. Furthermore, running through all of these issues is labor. Attracting and retaining workers is already much more challenging than expected given the economy went through a severe recession last year. There are a variety of simultaneous factors impacting the number of available workers including strong household finances, the virus itself, and lack of childcare or in-person schooling. While the temporary pandemic-related constraints will ease in the months ahead, the labor market is expected to remain tight for the foreseeable future in large part due to demographics and the large number of Baby Boomers retiring.
With the prospect of strong growth and near-term supply constraints, the possibility of an overheating economy has quickly replaced fears of a long-lasting, demand-driven recession like the past few cycles have been. Undoubtedly inflation will pick up in the months ahead. Production costs are rising quickly in part due to capacity constraints and bottlenecks. However these price pressures are coming off of a low base and are largely expected to be transitory. The Federal Reserve so far has indicated it will only become concerned should price pressures turn persistent. Given the overall economy is not at full employment, and generally strong wage growth is needed for persistent inflation, almost by definition the current bout of inflation is transitory.
In May of odd-numbered years, the revenue forecast takes on added importance. With the legislature in session, the May forecast determines the size of General Fund resources available for the upcoming budget, and sets the bar for Oregon’s unique kicker law.
Oregon’s state revenue outlook continues to brighten as the income tax season unfolds. Personal and corporate tax collections are booming despite the job losses and business woes brought on by the COVID pandemic. Tax collections based on consumer spending are also posting large gains. With the near-term economic outlook looking very strong, healthy growth in tax collections is expected to continue into the 2021-23 budget period.
In a typical year, the income tax filing season is winding down when the May forecast is produced. At that point, the vast majority of payments have been processed, and we have a good idea of how the tax season turned out. This year, the tax filing deadline was extended to May 17th due to the pandemic, leaving many returns yet to be processed. This injects added uncertainty into the outlook. In particular, there is the potential for a significant revenue surprise (up or down) in the final weeks of the biennium. That suggests that leaving a large ending balance would be wise. Also, it is possible that the size of the kicker credit for next year will change significantly from the current estimate when the kicker is certified this fall.
So far, with around half of payments having come in, the tax season is turning out to be a healthy one. Payments are expected to reach an all-time high by the end of the fiscal year. While there is still a large amount of payments outstanding, most of this season’s refunds have already been issued. Taxpayers who are expecting refunds tend to file returns earlier than those making payments. Refunds are significantly lower than they were last year, due largely to the kicker credit issued in 2020. This year, refunds include $81 million in automatic adjustments sent to 164,000 taxpayers who paid taxes on unemployment insurance benefits. In March, the federal government exempted the first $10,200 in unemployment benefits from taxation. The Oregon Department of Revenue has sent refunds to taxpayers who filed before the exemption was announced.
In light of massive job losses, Oregon’s General Fund revenue outlook for the current biennium was revised downward by around $2 billion immediately following the onset of the COVID-19 pandemic. As of the May 2021 forecast, this hole has more than been filled, with the outlook now calling for significantly more revenue than was expected before the recession began.
Many factors are playing into the unexpectedly strong revenue collections, but two reasons stand out. First, an unprecedented amount of federal aid has far outstripped the size of economic losses. As a result, personal income is up sharply in Oregon despite job cuts. Second, during the typical recession, Oregon has lost a tremendous amount of revenue associated with sharp declines in investment and business income. This time around, asset markets and profits have remained at or near record highs. The baseline outlook prior to the recession called for income growth to slow. A tight labor market was expected to weigh on growth, and asset prices and profits were expected to return to sustainable levels. None of this came to pass, leading to an expected personal income tax kicker of $1.4 billion and a corporate tax kicker of $664 million.
Looking forward into the 2021-23 biennium, the increasingly rosy economic outlook suggests healthy tax collections will persist. A broad consensus of economic forecasters is calling for near-term output growth to be the strongest seen in decades. Given Oregon’s unique kicker law, a booming economic outlook requires an equally aggressive revenue outlook to match it. Taxable income is expected to continue to post healthy gains, showing no evidence of the economic shock we are living through. The outlook for General Fund tax collections has been revised up by around 5% over the next few years. This translates into significantly more resources for policymakers.
Although budget writers have a lot more to work with, a good deal of caution is required and savings are a must. The kicker law dictates that we stick our necks out with an aggressive revenue outlook, exposing us to the risk of a large budget shortfall should growth stall. Of primary concern are nonwage forms of income including profits and the return on investments. With a healthy underlying economy, economic forecasters are calling for continued growth in stock prices, profits and the like. Although valuations are unsustainably high right now, forecasters predict underlying economic activity will catch up over time. Unfortunately, this does not mesh well with our past experience. Profits and capital gains often evaporate overnight, which always puts Oregon’s budget in a hole.
See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.
The prospect of pandemic-related retirements was one labor supply issue that we left on the cutting room floor of our joint report with the Employment Deparment last month. It’s worth exploring a bit further, especially as Jed Kolko is out in the NYT this morning with a national article on the topic, and I just so happened to have finished updating our retirement projections yesterday 🙂
First, Jed finds that the share of older Americans who are not working and specifically say they are retired did increase a little bit in the past year. Our office takes a bit of a more holistic view of retirement in Oregon — we count anyone 60 years and older who is out of the labor force for whatever reason, in part because the splitting the already small sample into the different possible answers yields some noisy results. Even so, we know retirements have been large in recent years.
The labor market is tight for demographic reasons, irrespective of the business cycle. The inflows into the labor market (young adults) are basically equal to the outflows. The tight demographics are expected to remain for the next handful of years as a large number of Baby Boomers retire each year. That means labor force gains will be smaller on net, and come from in-migration and other middle-aged adults returning to the workforce in search of the more-plentiful, and higher-paying job opportunities. Wage growth should remain strong as a result.
This overall dynamic is not new and these demographic patterns are a key piece to the labor market and public revenue outlook in the decade ahead. Our office dug into retirements in more detail nearly five years ago, and again two years ago.
Today a key question is whether the increase in retirements was forced due to involuntary job loss versus planned or based on the strong asset markets that better support retiring financially. Here the data points more to the former, rather than the latter. In his research, Jed finds the increase in retirements nationwide among those in their late 50s or early 60s occurred right at the start of the pandemic, and was concentrated among those without a college degree. Retirements did not pick up or accelerate later in 2020 or in early 2021 when the impact of the record home prices and stock markets would make retiring easier from a financial standpoint.
Now, another factor in play here may be Social Security. We know that 1 in 10 Oregonians in the workforce is eligible for Social Security. They can retire today and have the security of at least receiving some benefits, regardless of whether or not personal savings is adequate or at an all-time or the like. It is possible that some workers immediately chose this option at the start of the pandemic, especially in light of the fact that the health impacts of the virus were much more severe among our older friends, family, and neighbors than on our younger ones. Case in point, the increase in those receiving Social Security has slowed nationally but for the terrible reason that deaths have increased during the pandemic.
Looking forward it can be hard to know whether the current job losses among older workers will be permanent or whether some workers will come back when it is safe to do so.
The table below shows job losses by major occupational group in the past year for the overall economy and for older workers. What it shows is older workers have seen much larger job losses overall, but they are really concentrated in a handful of occupations. Teachers account for nearly half of the overall gap. There are a variety of reasons this makes sense. First, we know substitute use is down with online learning and many substitutes are retired teachers. Second, in some other states, schools returned to in-person learning earlier and teachers may not have been a vaccination priority group, increasing the health risks. Many older teachers may have taken the pandemic as an “opportunity” to retire.
Besides teachers, there were large job losses among Community Service occupations, specifically clergy. Additionally in Health Support, or lower skilled nursing or health aid jobs. These jobs, along with teaching, are high contact, in-person services which exposes workers to the virus to a greater degree. Together they account for 70% of the gap in terms of older workers being harder hit than the overalle economy in the past year.
On the flipside, high-wage jobs were largely unaffected, especially among older workers. This, like Jed’s educational attainment findings, is at least an indication that strong asset markets were not a primary driver of retirements in the past year.
Bottom Line: Older workers have become increasingly important for the overall economy. Retirements are both a disruption and an opportunity. The disruption is because firms lose valuable employees with a lifetime of experience. The opportunity is for younger workers to step into these roles. These transitions are not seamless, and play out over years, if not decades. The pandemic may have accelerated some of these changes, but it is hard to fully nail down in the current data. That said, these broader demographic patterns will be with us for the foreseeable future and have big impacts on the economy.
Last fall, Oregon voters passed Measure 108 at the ballot box, increasing tobacco taxes and establishing a new tax on inhalant delivery (vape/e-cigs). The changes went into effect at the start of this year. Right now we’ve only had a couple of months with the changes. To date it looks like the revenues are coming in roughly in-line with expectations*. In recent forecast reports we’ve dusted off the border tax framework when talking about the outlook. While used many times over the years here on the blog, it looks like we haven’t talked about it here since the Oregon Vice report and presentation which was nearly 4 years ago! So without further ado.
Today, Oregon sells 50% fewer cigarette packs than we did in the 1990s. This is due to a lower smoking rate (16% vs 25%) but also due to less consumption among smokers (the average smoker today smokes 0.5-0.75 packs per day, in the 1990s they averaged a full pack). Update: the rest of the post talks about taxes but there is certainly a broader societal change impacting tobacco trends as well, likely in part due to the studies on the health impacts of smoking, etc.
The literature generally shows that the price elasticity of demand for cigarettes is around -0.4, meaning a 10% increase in price results in a 4% decline in sales. The research also shows that tax increases work through both the overall smoking rate, and the smoking intensity to reduce demand.
As such, taxes matter. It can be hard to disentangle the impact of higher prices and taxes on smoking behavior from cessation programs because cessation programs are usually funded from the increased taxes. This has certainly been the case here in Oregon.
Additionally, taxes matter so much in fact that Oregon currently sells more packs of cigarettes than Washington even though they are nearly twice our population but they also do have a lower smoking rate (12%). The primary reason Oregon outsells Washington is cross border activity due to the $3.03 per pack tax in Washington and the (old) $1.33 per pack tax in Oregon. There is considerable money to be saved by buying in Oregon, especially with around 1 million Washingtonians living along the Oregon border.
Going back to 1980, Oregon has always had a lower cigarette tax than Washington and any time Washington raise their tax, sales fall there but hold steady or rise in Oregon. Due to this big cross border activity, a more appropriate price elasticity of demand for Oregon is larger than the overall literature suggests, possibly in the -0.7 range or so.
All of that standard material said, the changes Measure 108 made are very large from a historical perspective. The cigarette tax per pack was increased $2, going from $1.33 to $3.33. Oregon’s cigarette taxes are now higher than Washington’s, at least leaving to the side the impact of Washington’s retail sales tax (which has always existed). If historical patterns hold, Oregon cigarette sales will drop noticeably this year, while they will likely hold steady or decline more slowly across the river. Only time will tell just how much this change in tax policy impacts consumer behavior.
In terms of revenue, the new, additional $2 per pack is dedicated to health programs and tobacco cessation. The General Fund portion of cigarette revenues is down due to that weaker underlying sales forecast for the number of packs sold. But all told, total tobacco revenues for the State of Oregon will increase in the short-term due to the higher taxes, but are expected to resume their downward trend as fewer Oregonians use tobacco, and those that do use less. See our Table B.6 in Appendix B of our forecast document for the full breakdown of tobacco related revenues.
* Cigarette revenues are a little lower than expected these first couple of months, but generally within the range of noisy data. The initial inhalent delivery revenues are noticeably larger than expected but it is currently unknown just how much of that reflects current sales versus existing inventory that was carried over from previous months. But all told, again, within the realm of expectations. Our office will not be adjusting the long-term forecast due to the initial few months following a large change in tax policy. We will continue to monitor the data and should actual collections differ noticeably from the forecast in the year ahead, we will adjust the outlook accordingly.
This morning the Oregon Employment Department and the Oregon Office of Economic Analysis are releasing a joint article on the current state of the labor market and why it may be harder for businesses to find workers than you might think. Download a PDF at the link below, or find the post below the fold.
Mark McMullen
Josh Lehner